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Guest Article
by Karen W. Ferguson
Examined from the perspective of the pension plan participants it sought to protect, the Employee Retirement Income Security Act of 1974 has been an extraordinary success. The law's principal objective, according to its sponsors, was to protect the reasonable expectations of the 34 million workers then covered by private retirement plans -- to put an end to broken pension promises.
ERISA has done an impressive job in achieving that goal. No longer can a company deny a pension to an employee with 35 years of service solely because he is unable to work until his 65th birthday. Nor will a retiree have his lifetime pension cut off because his plan has terminated without sufficient funding to pay promised benefits. /1/ And it is far less likely that if a pension plan is plundered, employees will lose all of their pension money.
The statistics that best tell the story of ERISA's achievements are those showing the percentage of recent retirees receiving pensions. According to Census Bureau data, nearly half of private-sector retirees ages 65-69 are receiving, have received, or expect to receive benefits from a private retirement plan. For men, the proportion goes up to three-fifths. /2/
Even for traditional pensions the numbers are encouraging. Overall, nearly two-fifths of recent retirees are receiving annuities, and more than half of recently retired men are receiving these lifetime monthly benefits. /3/ All told, nearly 15 million people are receiving some kind of private pension benefit. /4/
The fact that these numbers are not higher is traceable largely to the fact that pension coverage has remained relatively constant over the past 25 years -- at about half the full-time private workforce. Among older employees, ages 55-59 it has increased slightly from approximately one-half of the private workforce in 1972 to three-fifths in 1993. (For men it is also three-fifths.) /5/
In this connection, it is important to note that despite statements by some Members of Congress suggesting that the law was intended to expand pension coverage, ERISA contained no provisions designed to encourage more employers to sponsor plans. In fact, it was the absence of such provisions that prompted Congress to authorize the creation of Individual Retirement Accounts.
Today's Disappointments
The major sources of disappointed expectations for employees participating in pension plans in 1999 are attributable to problems that ERISA did not try to solve. A little known fact is that the most important of these would have been eliminated by the legislation adopted by Congress in 1974. As passed by both the Senate and House, the final version of the law would have expressly outlawed pension integration, the practice that permits companies to subtract social security payments from workers' pensions. But, as the result of a quickly mobilized after-the-fact lobbying effort, the provision was removed from the law by a technical amendment. /6/ Although the law's integration provisions were modified by the Tax Reform Act of 1986, this practice continues to surprise and disappoint retirees today. /7/
A second deliberate omission (although of less consequence to workers), was the dropping of the so-called "portability" provisions from the bills that became ERISA. Like the "portability" provisions in this year's recently vetoed tax bill, /8/ these actually had nothing to do with portability as it is understood by employees. They would have had no say in whether they could take their pensions with them to new jobs. Instead, the provisions would have merely facilitated the transfer of those lump sum payments that employers were willing to let their employees cash out.
Still another omission from ERISA may have been inadvertent. It is likely that few, if any, of ERISA's sponsors were aware that the law's participation requirements (which required the inclusion of all employees of an employer over age 25 who had worked 1,000 hours in a year), /9/ could be completely undercut by previously existing coverage exclusion rules in the Internal Revenue Code. /10/ There is nothing in the legislative history to suggest that the law's champions would have countenanced a situation where a 65-year-old secretary, who had worked 24 years for a small firm, could be denied a pension solely because the plan excluded the category of "secretaries working for the company." /11/
Although the coverage exclusion rules were amended in 1986, it is still possible for a company to exclude 30 percent of its employees from plan coverage for any reason, and considerably more (up to twice that amount) if the plan meets the law's complicated 70 percent or average benefit percentage tests. /12/ These rules may make sense in a highly diversified company, but there appears to be no justification for not requiring 100 percent coverage in a single line of business. /13/
The other major sources of disappointed expectations for today's workers and retirees were simply not issues in 1974. For example, by far the biggest disappointment for retirees today is the erosion of the purchasing power of their pensions. Retirees who stopped work in 1980 have seen the dollar value of their benefits cut by more than half. They consider their companies' failure to adjust their pensions for inflation to be a breach of trust, particularly in the many instances in which their plans have billions of dollars more than they need to meet projected benefit obligations.
In 1974, there was little discussion of the impact of inflation on private pension benefits. In part, this was traceable to the fact that most large plans gave periodic increases. Census data shows that before 1975, 44 percent of annuity recipients reported receiving cost of living adjustments. By 1993-1994, the percentage had dropped to 9 percent. /14/
Employees' Disappointments
For employees, the post-ERISA disappointments have typically come as the result of the loss of anticipated subsidized early retirement benefits. Employees have not lost their entire pension, as they might have before ERISA, but they have lost the benefits they had counted on getting. Until recently, the most frequent complaint came from employees whose divisions were sold just before they would have been eligible for a subsidized early retirement benefit. At age 53, after 28 years of work the employee is put under the acquiring company's plan and continues to work in the same job. He is told that instead of getting the old plan's subsidized early retirement pension at age 55, he will be eligible to receive only his deferred vested benefit, ordinarily worth less than half of his expected benefit.
As in the case of coverage exclusions, this result appears to have been unintended. Although subsidized early retirement benefits were common among large employers and multiemployer plans in 1974, merger mania had not yet begun, and the focus was principally on employees in troubled companies with underfunded plans. In 1984, when the issue arose in a slightly different situation -- the amendment of a plan before the conditions of the subsidy had been met -- Congress acted to protect the pro rata share of the subsidy for those employees who subsequently satisfied its conditions. /15/
In the sale-of-a-division situation, it is the workforce that is "amended," not the plan, but the potential losses to the employees are the same. When the employees' pro rata share of the early retirement subsidy is already fully funded, they feel that it is inequitable for their former plan to get a windfall from the forfeiture of their expected benefits if they later meet the requirements for the subsidy. /16/
Although affected employees frequently protest their loss of expected benefits, they are rarely sufficiently organized to be effective. A noteworthy recent exception involved Prudential Insurance Company employees. When they learned that the sale of the Prudential Healthcare unit to Aetna US Healthcare would result in reductions of their expected benefits by as much as 40 percent, they spoke up. As reported in the July 1st Wall Street Journal, the company agreed to give them a share of their subsidized benefits. /17/
The broken promises most in the news in recent months are those resulting from cash balance conversions. Again, the employers have changed the rules of the game or, in the words of an IBM employee, moved the goal posts in the fourth quarter. In these cases, the pro rata share of the subsidized early retirement benefits are likely to be protected (since the employees continue to work for the same employer), but their pensions are frozen and they are denied credit for their future years of work.
As IBM and other employers have discovered, defending an unfair action against current employees may not be easy, particularly when the employees are able to calculate the very sizeable extent of their losses, are acutely aware both of their employer's cost cutting motivations and the tremendous size of their plans' surpluses, and can communicate with each other anonymously on the Internet.
Over time, it is likely that Congress will address most, if not all, of today's broken pension promises. Employees are becoming proficient at organizing, a nationwide grassroots coalition has been formed, major employee and retiree groups are finally beginning to realize that pensions are of great interest to their members, and politicians are learning that pension security is likely to be a major issue on the campaign trail.
Administrative and Judicial Problems
Far more difficult to solve will be the much bigger problems resulting not directly from ERISA, but from its administration by the government agencies and the courts.
For example, while Congress was working on ERISA amendments in the 1980s to make plans fairer -- and thus more consistent with employees' reasonable expectations -- the administrative agencies were opening up escapes from equity -- initiating regulatory actions that have had the effect of encouraging employers to stop improving, cut back on, and even abandon, traditional pension and profit sharing plans.
These included interpretations of the laws that invited employers to take reversions of surplus assets (until that practice was largely stopped by the imposition of excise taxes by the Omnibus Budget Reconciliation Act of 1990), and to adopt creative ways of protecting the assets of nonqualified plans for executives, both of which significantly diminished the likelihood that worker and retiree pension benefits would be increased.
But the most far-reaching ruling, and ultimately the one that has been most detrimental to participants' pension interests, was the 1981 ruling that led to the proliferation of 401(k) plans. Although section 401(k) had been added to the Internal Revenue Code in 1978, it was not until the Reagan administration that employee contributions to these plans were ruled to be tax deductible. /18/ The era of "do-it-yourself retirement" had begun.
Although 401(k) advocates like to attribute the decline of traditional pension and profit sharing plans to ERISA's burdensome regulations, /19/ until 1981, most employers had been more than willing to accept the tradeoff inherent in conventional plans: If they followed complex regulations, they could skew their plans toward favored employees. Conversely, if they were willing to provide equal benefits for all workers and pay benefits in the form of annuities, they didn't have to read any regulations at all.
What 401(k)s offered was what Barrons magazine described as a "cheap treat." /20/ Employers could reduce their retirement costs by as much as two thirds, by canceling their traditional plans and substituting 401(k)s. /21/ The cost saving came because companies contribute (if they contribute) only for those employees who can afford to put money in first.
According to the Labor Department, in 1995 there were 28 million people in 201,000 private-sector 401(k)-type plans. /22/ But despite the large number of participants and large number of plans, there is little data suggesting that 401(k)s will provide much in the way of income for most working Americans. The latest government figures, which are from the 1995 Survey of Consumer Finance, show that although 26 percent of all households have 401(k) type plans, half of these households have less than $10,000 in their accounts.
There are a number of possible explanations for the small amounts in the typical 401(k) account. The most likely is that the median full-time, year-round worker, who earns only $30,000 a year, /23/ cannot afford to contribute much, if anything, to these plans for retirement until fairly late in his or her worklife -- after other expenses, such as housing and education, are taken care of. For the same reason, the money that is contributed is often withdrawn. Also, for many people actual investment returns are very low. Employees with smaller accumulations feel that they cannot afford to take risks, so get little in investment earnings. In addition, because they tend to work for smaller firms, the fees they are charged are often disproportionately high. Although account balances are likely to grow over time, over time inflation, annuitization costs, taxes, and in many cases excessive investment in company stock, are likely to take their toll.
The principal problem with 401(k)s -- other than their unknown but very substantial cost to the Treasury -- is that they benefit only those employees who can afford to take maximum advantage of them. This is a problem because they are substituting for plans that provide benefits to employees at all income levels. Fortunately, important work is now being done to document the extent of this substitution. /24/ What is already known is that they are replacing both defined benefit and employer-paid defined contribution plans among small employers, and have resulted in a freeze in defined benefit plan improvements among larger companies.
We are already at a point in this country where income inequality among the elderly far exceeds that of our major global competitors. /25/ The continuing shift away from employer-paid pension and profit sharing plans and toward employee-paid savings plans will inevitably widen this gap even further. The 401(k) proposals passed by Congress in the recently vetoed tax bill would seriously exacerbate this trend. The proposed legislation would raise the current $10,000 yearly employee contribution limit to $15,000 -- half the salary of a median income worker -- and to $22,500 for people age 50 and over. The combined employer-employee limit would go up to $40,000. /26/ It is difficult to think of any more misguided set of policy initiatives in the entire 25 years since the enactment of ERISA. Yet there appears to be little public understanding of their impact.
Where the Courts Went Awry
Just as the implementation of ERISA by the administrative agencies is undercutting the law's underlying long-term objective -- to promote retirement security for American workers -- interpretations of the law by the courts have undermined its more immediate goal of protecting individual rights.
Although most participants receive the benefits conferred by ERISA with little difficulty, a good many do not. For those individuals whose benefits have been improperly denied, the test of the effectiveness of the law is whether their rights can be vindicated. As every pension lawyer in the country is aware, there is probably no more uneven playing field in any area of the law. The odds are so stacked against participants that an ABA management newsletter once carried an article urging employers to "ERISA-fy" every conceivable plan to ensure that their employees would have no chance to enforce any employment-related rights.
The reality is that individuals who have been wrongly denied their pensions are blocked at every turn by court rulings that make it extremely difficult for them to find lawyers to represent them, and virtually impossible for them to prevail in court. In addition, if they win, these decisions assure that all they will get after years of costly litigation is exactly what they should have been awarded at the outset, regardless of how egregious the actions of the fiduciary have been, or how much injury results from the plan's failure to make timely payment. Significantly, these barriers to plaintiffs' pension litigation are not the result of specific provisions of ERISA, but only of judicial interpretations of those provisions.
For example, section 502(g)(1) specifies that in cases brought by participants, courts have discretion to award a reasonable attorney's fee and costs of action to either party. /27/ Standing alone, this language suggests that there is a good chance that attorney's fees will be awarded to a prevailing plaintiff. But in a number of circuits, attorney's fees will be denied, unless there has been a showing of bad faith by a plan fiduciary. Since most denials are the result of differences in plan interpretation, lawyers in these circuits know that they will not be awarded fees, and if a claim is for a small amount, as most are, they will refuse to take a participant's pension case.
In circuits where participants are able to find lawyers, their chances of winning their cases are slight, since absent the most blatant kinds of conflict of interest, the courts will almost invariably defer to a plan fiduciary's denial of their claim. And, as for the occasional case where a participant actually wins, the remedies are likely to be woefully inadequate.
How could this be? In each of these areas -- attorney's fees, standard of reviews, and remedies -- it is possible to identify where the courts went wrong. In each case, a ruling appropriate for the particular issue before the court at the time was used by later courts to create a line of cases that effectively denied employees any hope of effective enforcement of their rights.
For example, the lead case on attorney's fees, Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978), was a mismanagement of money case that involved the question not of whether attorney's fees should be paid, but who should pay the fees that the court had decided to award. Should it be the plan's fiduciaries, or should the fees be paid from the assets of the plan? The court developed five factors to be weighed in making this decision, one was whether there had been bad faith, another was the amount of benefit conferred on members of the pension plan as a whole. /28/
Although weighing these factors makes a lot of sense in deciding who should pay the fees, they make no sense at all in deciding whether payment should be made. Nonetheless, the Penn five factors were adopted by a subsequent case where the issue was whether payments should be made, and other courts have followed suit.
Similarly, the line of cases that denied de novo review of benefit claim denials started with pre-ERISA decisions under the Taft-Hartley Act that dealt with the very different issue of whether union and management plan trustees of a multiemployer plan had acted reasonably in prescribing restrictive benefit eligibility requirements. Since the trustees had discretionary authority under the trust agreement to set the rules, the courts limited their review to whether the trustees had abused their discretion or acted arbitrarily and capriciously.
After the enactment of ERISA, courts began applying this same deferential standard to ERISA's claims and appeals procedures. They did so without remarking that these procedures were never designed to be impartial, usually consist of little more than a cursory exchange of letters, and involve interpretation of plan documents (or the law), not the discretionary setting of plan rules. Nonetheless, the Supreme Court adopted the abuse of discretion standard, with only slight modifications, in Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101 (1989).
Finally, the case that has been repeatedly cited as precedent for denying extra-contractual and punitive damages to participants in benefit claims cases was also aimed at something quite different. Massachusetts Mutual Life Insurance Co. v. Russell, 473 U.S. 134 (1985), was a case brought under section 502(a)(2), which provides that a participant can sue plan fiduciaries who breach their fiduciary obligations under section 404 for appropriate relief under section 409. /29/ Section 409 provides that the fiduciaries are personally liable to restore any losses to the plan resulting from the breach. Section 502(a)(2) suits, such as the one involved in the Russell case, are plainly equitable actions, where the goal of the litigation is only to make the plan whole. In these cases extra- contractual or punitive damages would be inappropriate.
But cases such as Russell are very different from pension benefit claims cases under section 502(a)(1)(B), where extra- contractual damages may be needed to assure that individuals, rather than plans, are compensated for their losses, and where punitive damages can serve as a deterrent to fiduciary misconduct. Nonetheless, Russell has been consistently cited to bar nonequitable remedies in ERISA cases.
How could the courts have gone so far wrong? One answer is that no advocate with the requisite institutional knowledge of ERISA's legislative history and the special nature of pension benefit claims was involved in these cases at an early enough stage to argue effectively that the statutory framework required different results.
No Voice for Participants
Had there been an institutional voice for participants' pension concerns throughout the past 25 years, both the judicial and public policy landscape would look very different today. In fact, early versions of the bills that became ERISA included a pension commission, a single agency focusing solely on employee benefits. The absence of a government commission or agency with a mandate to advance participants' pension interests, although not a problem in the day-to-day administration of the fiduciary, insurance, or tax qualification provisions of the law, has been ERISA's "fatal flaw" in the areas of policy development and enforcement of individual pension rights.
Observers unfamiliar with the law assume that the Labor Department must have such a mandate, but it does not. It sees its role very narrowly. As stated in its most recent annual report,
The Pension and Welfare Benefits Administration (PWBA) of the U.S. Department of Labor protects the integrity of pensions, health plans and other employee benefits for more than 150 million people. The agency's mission includes administering and enforcing the fiduciary, reporting and disclosure and coverage provisions of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). The provisions of Title I were enacted to address public concerns that funds of private-sector employee benefit plans were being mismanaged and abused. /30/ (emphasis added)
There is no mention of a commitment to promote sound pension policies or to protect individual participants.
Since the department takes the position that its role is only to protect the integrity of employee benefit funds, its participation in public policy issues tends to emphasize matters relating directly to that role. In litigation to enforce individual pension rights, with rare exception, the department's only involvement is to file an occasional amicus brief.
Like the Labor Department, the Pension Benefit Guaranty Corporation's activities are limited to those encompassed within its statutory mandate. The most important of these is providing for "the timely and uninterrupted payment of pension benefits to participants in terminated plans." Although these activities are designed to protect participants, they necessarily result in the agency being placed in an adversarial position when it denies participants' benefits. The PBGC is also charged generally with the "promotion of voluntary private pension plans," but its policy activities tend to be limited to assuring the solvency, and enhancing the appeal to employers, of defined benefit plans.
Ironically, it has been the activities of the Treasury Department and the IRS, neither of which has any responsibility for advancing participant interests, that have had the most positive impact both on policy development and the enforcement of individual rights. Treasury's concerns with avoiding tax abuse, and the authority of the IRS to require compliance with ERISA's minimum standards have played critical roles in the enhancement of pension rights over the past 25 years. Yet, precisely because the agencies' actions are necessarily reactive, rather than proactive, and motivated by revenue concerns, the results have often been less than satisfactory for plans and participants alike.
This summer's lobbying on the tax bill provides a helpful illustration of the limitations of the agencies' roles. The bill, largely the creation of pension industry lobbying groups, with a few provisions for multiemployer unions thrown in, was based primarily on H.R. 1102, the Portman-Cardin bill, a cornucopia of tax breaks for private retirement plans that cut back on key protections for participants.
The Labor Department focused almost entirely on a provision that would have limited its ability to pursue fiduciary litigation after a private party had secured a settlement. The PBGC supported the provisions in the bill that would have increased the amounts defined benefit plans could pay out in benefits to company owners and officers, on the theory that this would persuade employers to continue their plans thus preserving the PBGC's premium base. At the same time, Treasury opposed those provisions on the ground that they would cost Treasury billions of dollars in lost revenue, while reducing, rather than increasing, benefits for lower-paid workers.
Although each agency would defend its actions as promoting the interests of participants, in fact they were focusing primarily on furthering their own institutional interests. There was no affirmative pro-participant agenda, simply because no agency saw the development of such an agenda as its responsibility. /31/
In this regard, pension regulation appears to differ from other areas of the law. The Securities and Exchange Commission has as its principal responsibility the protection of investors. Similarly, agencies such as the Food and Drug Administration and the Consumer Product Safety Commission are charged with protecting consumers. The Environmental Protection Agency has as its mission protection of the environment. As in the pension area, all are involved in balancing the competing interests of businesses and individuals, but the difference is that their mandate, to protect the vulnerable investor, consumer, or spotted owl, is clear.
The one time a single entity was established with an explicit mission to promote retirement security, the results were impressive. In 1978, President Jimmy Carter established the President's Commission on Pension Policy. The commission spent two years focusing on all aspects of retirement security, and came up with a list of pension reform recommendations. With one notable exception, virtually all have since become law. /32/ The exception was the commission's proposal for a minimum mandatory pension. The commission's "MUPS" proposal went nowhere because it was supported neither by industry nor consumer groups. /33/
Has the time come for a single pension agency? Probably not. As a practical matter, the consolidation of the three existing agencies would cause a great deal of disruption for relatively little gain. Industry groups have developed long-standing relationships with each agency, and it would be costly and difficult to mesh the agencies' very different cultures and procedures.
The possibility of merging the agencies was actually studied some years back by a task force set up by the Office of Management and Budget. The task force rejected the concept as unnecessary, since the existing structure appeared to adequately address what were perceived to be the essential administrative activities, enforcement of the laws' fiduciary, insurance, and tax qualification provisions. In addition, there was an acute shortage of office space at the time -- there was no building anywhere in the Washington area large enough to house a new single agency.
But the fact that there is no pressing need to unify the existing agencies, does not mean that nothing should be done. There is a tremendous administrative gap that urgently needs to be filled. There is a need for an agency, commission, board, administration, bureau, institute, or simply a consumer or Ombuds-type office, that has an express mandate to promote retirement security by serving as a spokesperson for individuals in pension plans, as well as for those currently without plan coverage.
What Is to Be Done?
What would this entity do? Its most important function would be identify gaps in the laws, develop reform recommendations, and serve as an advocate for current and prospective pensioners before other government agencies and Congress, and to the extent resources permit, before the courts.
Initially, the office could be small, similar to the White House Women's Office, which operates out of a suite in the Old Executive Office Building. Its staff could meet regularly to discuss policy initiatives with other agency staff at the interagency meetings now regularly convened by National Economic Council. Establishment of the office could be by Executive Order. /34/
What specific kinds of activities might this new office undertake? In all likelihood, a priority would be to develop a public-private pension assistance system out of the hodgepodge of inadequate and uncoordinated programs that now exist. There is a compelling need for a single point of entry for people with pension problems, together with a network of counseling and legal and actuarial assistance programs that can be coordinated with the services now provided by the Labor Department, the IRS, the PBGC, and other government agencies.
The office would be in a position to spur regulatory actions that would benefit participants. For example, 25 years after ERISA, two sets of proposed regulations and two hearings, the Labor Department still has not issued Individual Benefit Statement regulations, even though this has meant that multiemployer plans are still not required to give benefit statements to plan members.
Such an office might undertake to negotiate with industry groups and the defense bar on how to reach an equitable resolution of the attorney's fees, standard of review, and remedies problems, to assure that meritorious claims are litigated, and injured parties are made whole, without inviting frivolous litigation and imposing excessive costs on plans. At the same time it would be in a position to work with the ABA to continue efforts, currently underway thanks to a Tort and Insurance Practice Section initiative, to develop a pilot voluntary, nonbinding alternative dispute resolution program for pension claims.
Then, the office would likely focus on the development of legislative initiatives to address concerns brought to the attention of the office by participants and beneficiaries. These initiatives would almost certainly address integration and coverage exclusion problems, and also include true "portability" proposals (for example, a measure that would give employees, not just employers, the option to transfer benefits accumulated under one defined contribution plan to another).
Finally, the office would be in a position to encourage research and policy initiatives aimed at expanding coverage. It might initiate long-overdue studies to assess the extent to which voluntary savings plans are likely to provide meaningful supplements to social security for rank and file workers, or even prod the Office of Tax Analysis to finally determine the cost of the federal tax expenditure for 401(k) plans. But, most important, its staff could work with policy staff in other agencies and the private sector to develop a consensus to determine the elements of good pension programs, and what incentives are needed to promote them.
For example, they might conclude that key components of such programs are that benefits are provided to workers at all income levels (not just those who can afford to save on for themselves), that payments are made solely as indexed annuities at retirement age, and that they are insured, simple, fair and portable (within the retirement system). At the same time they might decide that the way to encourage such plans would be to provide increased tax incentives only to plans that meet these criteria. They could then determine how proposals such as SAFE, SMART, and Pension ProSave measure up to these criteria, and explore other concepts such as expanded USA accounts, Simplified SEPs, and those put forward by the Pensions 2000 Committee, and by Daniel Halperin and Alicia Munnell at a recent Brookings Institution ERISA anniversary conference. /35/
The current cash balance conversion controversy highlights the critical need for this kind of consumer-oriented government pension office. Right now there is no single place to send individuals with concerns about cash balance conversions. If they have received misleading information about their benefits, the logical place for them to go is the Labor Department. Accordingly, IBM employees met with Labor Department staff to start the process of determining whether the communications they had received constituted breaches of fiduciary duty. They then met with EEOC officials to review their claims of possible violations of the Age Discrimination in Employment Act. In addition, they contacted the IRS to inquire about possible age discrimination under ERISA and the Internal Revenue Code.
Other employees from all over the country are trying to figure out if their company's actions are lawful, and how to calculate the amount of benefits they stand to lose, if any, as the result of their plans' conversions. But they have no idea where to go for help. A few lawyers and actuaries have volunteered to provide information and calculations, but there is no central place through which they can offer their services, particularly as most represent clients involved in conversions and so have to provide this help secretly.
The employees also need to be referred to pension experts willing to analyze plan and corporate financial statements to analyze their employers' claims that they cannot afford to permit employees to stay under their old plans. Those that have found help have learned that their plans have billions of dollars in "surplus" funds that could easily be used for this purpose. /36/
On the policy side of the cash balance issue, the need is equally great. Which of the three existing ERISA agencies can be reasonably expected to review the Pension Benefits Protection and Preservation Act (H.R. 2902 and S. 1640) from the participants' perspective, and offer suggestions of how it might be shaped to respond to industry objections so as to secure its enactment? This legislation, introduced recently by Reps. Bernie Sanders and Maurice Hinchey and Sen. Paul Wellstone, would give employers converting their plans the option of offering their employees a choice to stay under their old plans, receiving benefits under both the old and new plans, or terminating their plans and paying the full 50 percent excise tax. Since the legislation will not further the institutional self-interests of any of the agencies, the answer is likely to be that none will make it a priority. That is why a participant-oriented consumer office is so urgently needed. Overcoming the obstacles to its creation would be an appropriate challenge for this ERISA 25th anniversary year.
FOOTNOTES
/1/ Preliminary Report of the Private Welfare and Pension Plan Study, 1971, Committee on Labor and Public Welfare, Subcommittee on Labor, U.S. Senate, 92d Cong. 1st. Sess. (1971).
/2/ U.S. Department of Labor, Pension and Welfare Benefits Administration, New Findings From the September 1994 Current Population Survey (1995), Table B2, p.47.
/3/ New Findings From the September 1994 Current Population Survey, Table B3, p.49.
/4/ New Findings From the September 1994 Current Population Survey, Table B10, p.60.
/5/ U.S. Department of Labor, Pension and Welfare Benefits Administration, Pension and Health Benefits of American Workers: New Findings From the April 1993 Current Population Survey, 1994, Table B16, p. B-22.
/6/ III ERISA Legislative History 4731-4732 (1974).
/7/ Ellen E. Schultz, "The Pension Eraser: 'Integrating' Social Security Can Cut Benefits," Wall Street Journal, March 12, 1997.
/8/ H.R. 2448, 106th Cong., 1st Sess. (1999).
/9/ Now age 21. 29 U.S.C. section 1052; 26 U.S.C. section 410(a).
/10/ 26 U.S.C. section 410(b).
/11/ Karen Ferguson and Kate Blackwell, Pensions in Crisis: Why the System is Failing America and What You Need to Know to Protect Your Future (1995), pp. 25-26.
/12/ See Nancy J. Altman, "Rethinking Retirement Income Policies: Nondiscrimination, Integration and the Quest for Worker Security," 42 Tax Law Review No. 3 (1987).
/13/ A proposal for requiring 100 percent coverage in a single line of business is included in S. 132, the Women's Pension Protection Act of 1999, introduced by Senator Olympia Snowe, R-Maine.
/14/ New Findings From the September 1994 Current Population Survey (1995), Table D8, p. 99. See also Bureau of Labor Statistics, Employee Benefits in Medium and Large Private Establishments, 1993 (1994), p. 129. "In 1983 more than half of private sector participants were in defined benefit plans that had provided at least one increase in the preceding five years. By 1993, that number had shrunk to 10 percent."
/15/ 29 U.S.C. section 204(g), 26 U.S.C. section 411(d)(6).
/16/ A proposal to deal with this problem was included in the Pension Bill of Rights Act of 1994, S. 2531, 103d Cong., 2d Sess.
/17/ Ellen E. Schultz, "Managers, Like Other Staffers, Are Fighting Pension Cutbacks," Wall Street Journal, July 1, 1999, p. C1.
/18/ An administration fact sheet noted that the ruling was designed to "encourage private savings and minimize regulatory burdens on businesses that wish to use deductible employee contributions to promote retirement savings by employees." Presidential Task Force on Regulatory Relief, "Small Business Regulations and Paperwork Requirements to Be Reviewed for the Presidential Task Force on Regulatory Relief," Reagan Administration Achievements in Regulatory Relief: A Progress Report, August 1982, attachment 2, p. 3.
/19/ Vineeta Anand, "A History of Good Intentions Gone Awry," Pensions & Investments, September 6, 1999, p. 19.
/20/ Leslie Eaton, "A Cloudy Sunset: A Grim Surprise Awaits Future Retirees," Barrons, July 12, 1993.
/21/ Andrea Knox, "Odds Appear Risky for Saving Enough," Philadelphia Inquirer, June 30, 1996.
/22/ U.S. Department of Labor, Pension and Welfare Benefits Administration, Private Pension Plan Bulletin: Abstract of 1995, Form 5500 Annual Reports, Number 8, Spring 1999, p. 2.
/23/ Bureau of Labor Statistics and Bureau of the Census, Annual Demographic Survey, March Supplement, Table PinC-07 Work Experience in 1997 persons 15 Years Old and Over by Total Money Earnings in 1997.
/24/ See William G. Gale, Leslie E. Papke, Jack VanDerhei, "Understanding the Shift From Defined Benefit to Defined Contributions Plans," ERISA After 25 Years: A Framework for Evaluating Pension Reform, Brookings Institution, September 17, 1999.
/25/ Timothy M. Smeeding, "Cross National Comparisons of Poverty, Inequality and Income Security Among the Elderly in Eight Modern Nations," National Academy on Aging Executive Seminar on Poverty and Income Security, June 29-30, 1992, p. 2.
/26/ In addition, the 25 percent of income cap would be eliminated, and top-heavy protections would be eliminated for safe harbor 401(k)s. See Peter Orszag, "How Pension Legislation Can Exacerbate Inequities in Pension Benefits: An Analysis of the Portman-Cardin Bill," Center for Budget and Policy Priorities, July 12, 1999.
/27/ 29 U.S.C. section 1132(g)(1).
/28/ The others were "the degree of the ability of the offending parties to personally satisfy an award of attorney's fees"; whether or not an award of attorney's fees against the offending parties would deter other persons acting under the same circumstances"; and "the relative merits of the parties," position.
/29/ 29 U.S.C. sections 1132(a)(2), 1104, and 1109.
/30/ Pension and Welfare Benefits Administration, U.S. Department of Labor, Employee Retirement Income Security Act 1997 Report to Congress (1999), p. 1.
/31/ Arguably, an exception was the support by both the PBGC and the Treasury of the SMART proposal, legislation that would create a simplified defined benefit plan for small businesses. However, the enthusiasm for this legislation was partly driven by the fact that it was a less costly variation of a proposal authored by the American Association of Pension Actuaries, and would enhance the PBGC's premium base.
/32/ These included reduced vesting, pre-retirement survivors benefits, division of pensions at divorce, and modification of integration rules. President's Commission on Pension Policy, Coming of Age: Toward a National Retirement Income Policy, February 26, 1981, pp. 1-2.
/33/ Participant groups generally saw the Commission's emphasis on the MUPS proposal as a diversionary tactic. MUPS was proposed by consultants for large plans who appeared to be advocating expanded coverage among small employers as an alternative to vesting, integration and other equity reforms in the larger plans of their clients. Their claim was "MUPS is not enough." See, e.g., Citizens' Commission on Pension Policy, A Blueprint for Pension Reform: Citizens' Goals and a Critique of the President's Commission on Pension Policy, February 26, 1981, pp. 4-6.
/34/ If the office were to expand, legislative authorization could be sought, along with a specific appropriation, possibly supplemented by a de minimis, per-participant negative checkoff-type contribution from plan participants to offset the cost to the Treasury.
/35/ Daniel I. Halperin and Alicia H. Munnell, "How the Pension System Should Be Reformed," Brookings Institution Conference on ERISA After 25 Years: A Framework for Evaluating Pension Reform, September 17, 1999.
/36/ Ellen E. Schultz, "Companies Reap a Gain Off Fat Pension Plans: Fattened Earnings," Wall Street Journal, June 15, 1999. Robert McGough and Ellen E. Schultz, "How Pension Surpluses Lift Profits," Wall Street Journal, September 20, 1999.
Karen W. Ferguson is Director of the Pension Rights Center, Washington, D.C.
Copyright 1999, Karen W. Ferguson. All rights reserved, but please feel free to link to this page: http://benefitslink.com/articles/assessing.html
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